In a letter to the Wall Street Journal, Donald J. Boudreaux, economics professor at George Mason University, claims that America’s trade deficit with China has benefits.
He also debunks the conventional wisdom about how China compares to the US in per-capita income, in the productivity of manufacturing workers, and in inflows of investment capital. He says that the US has a commanding lead in all three areas.
Below is Boudreaux’s letter, which the WSJ hasn’t published. Additional thoughts follow the letter.
Editor:
Your reporters portray China’s economy generally, and its large trade surplus in goods specifically, as evidence both of that country’s economic might and of its economic threat to other countries (“China’s Trade Surplus Tops $1 Trillion, Underscoring Its Export Dominance,” December 8.) This report, alas, lacks perspective as well as economic understanding.
First some perspective. Chinese per-capita income ranks 93rd in the world, lower than countries such as Belarus, Kazakhstan, and Uruguay. China’s per-capita income is less than a third of U.S. per-capita income, which ranks 13th in the world, behind mostly very small countries such as Monaco and the Cayman Islands. And while China manufactures more goods than does any other country – with the U.S. being second – on a per-capita basis the U.S. produces 160 percent more manufacturing output than does China.
Even more impressive is this reality noted by David Hebert and Peter Earle:
In 2020, the year of China’s most recent census, over 120 million people were working in the manufacturing sector. Later, independent reports have the Chinese manufacturing workforce at over 212 million people. This means that the average Chinese manufacturing worker generates between $22,028 and $38,916 in value-added. By comparison, America employs just 12.7 million manufacturing workers, which is 6-10.6% of the number of manufacturing workers that China employs. On average, US manufacturing workers generate $229,133, which means our workers are between 6 and 10 times as productive as the average manufacturing worker in China.
Now some economics: China’s large trade surplus means that that country is a net investor abroad and that global investment funds are flowing less to China than to other countries, including the United States. (Pres. Trump and other trade skeptics have yet to explain why we Americans should worry about our economy being so attractive to global investors.)
If China’s economy were truly the world-beating, destined-to-swallow-all-other-economies goliath that many people suppose it to be, global investors would be shunning the U.S. and other countries as they flood China with funds. Yet in 2024 inward foreign direct investment in China was $116 billion, a mere 40 percent of the $292 billion of FDI in the U.S. in 2024. The per-capita comparison is even more stunning, with China in 2024 receiving $82 per person in FDI compared to the U.S. receiving $854 per person – more than ten times the per-capita FDI of China.
It’s true that the Chinese government is much more restrictive on inward FDI than is the U.S. government, but this reality doesn’t explain why there’s a net outflow from China of investment funds. And this restrictiveness itself suppresses Chinese economic growth.
Sincerely,
Donald J. Boudreaux
Professor of Economics and Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
The professor doesn’t mention that China is catching up to us. It is producing more scientists and engineers in absolute numbers, has a lock on critical minerals and certain war materiel, is a world leader in EVs and green energy (while burning record amounts of coal), is leading in nuclear reactor construction and in the expansion and modernization of its electrical grid, is taking a lead in applying AI and robotics to the factory floor, has left the US way behind in shipbuilding and port automation, and is making major inroads in Africa, South America, and, with its Belt and Road Initiative, into the Middle East and to the Indian Ocean.
Also, of course, China’s population is 4.09 times larger than America’s. This means that even if its output per person lags the United States, it can produce a lot more on an aggregate basis.
The professor’s point about the US attracting much more foreign direct investment (FDI) than China is accurate. But many Americans have difficulty understanding why FDI increases in parallel with trade deficits. They have been led to believe that the US trade deficit with China has only a downside and no upside.
They believe this because the economics are complicated and counterintuitive, especially the relationships between trade deficits, capital accounts, international investment flows, and the national debt. Not being a PhD economist, I have to simplify the economics to understand them myself, or maybe I’m deluding myself that I understand them.
In simple terms:
First, China’s high savings rate facilitates its export economy but also facilitates our deficit spending. Here’s how: Chinese savings that might otherwise be spent on domestic consumption go instead to producing goods for export to the US (and other countries). In selling goods to Americans, China receives dollars in exchange. It then repatriates some of those dollars to the US by buying US Treasury bonds.
Second, it repatriates other dollars by buying US real estate or making other investments in the US.
Professor Boudreaux claims in other writings that China is beggaring its own citizens by such trade and economic policies—that the Chinese people are essentially foregoing the fruits of their labor by producing goods at low prices for Americans. Americans are getting tangible goods, and, in return, the Chinese are getting mostly pieces of paper (actually, electronic digits).
Although the truth is difficult to discern in China, it’s doubtful that the Chinese people feel beggared, in view of the fact that hundreds of millions of them have risen out of poverty in a remarkably short period, that their caloric intake has skyrocketed, that gleaming cities have sprung up across China, and that they are proud of China becoming a world power and getting back at the West for humiliating them for centuries.
That’s not to suggest that I would want to live in China. In about two days, I’d be in a reeducation camp or prison. In the US, I just get yelled at by the left and right.
As with other economists, Boudreaux says that tariffs on imported goods and other forms of protectionism will only serve to beggar Americans and make the US less competitive. There is strong disagreement in some quarters on that point, because there is little evidence of widespread economic harm in the short term.
In any event, imagine being a politician on the left or right and trying to explain the foregoing counterintuitive economics to voters. No wonder the left advocates socialism as the silver-bullet solution to what ails America and the right advocates mercantilism.
Boudreaux’s daily postings can be found at his Café Hayek blog, where he excoriates both Democrats and Republicans with impartiality when they choose statism over free markets and free trade.
You can yell at Mr. Cantoni at [email protected].
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